Demonetisation took the fizz out of Coke, CEO-designate says note ban drained liquidity

British-born James Quincey, who will succeed Muhtar Kent at Coca-Cola’s Atlanta corner office in May, told investors during an earnings-analysis call on Friday that 'demonetisation in India effectively drained liquidity', would ultimately help companies in the organised sector.ET Bureau | February 11, 2017, 07:51 IST

NEW DELHI: Coca-Cola is seeking to reverse a temporary slide induced by India’s currency swap, a one-off exercise its CEO-designate believes will eventually strengthen the prospects locally for the world’s biggest soft-drink maker.

British-born James Quincey, who will succeed Muhtar Kent at Coca-Cola’s Atlanta corner office in May, told investors during an earnings-analysis call on Friday that 'demonetisation in India effectively drained liquidity', would ultimately help companies in the organised sector.

"We expected the short-term disruptions (of demonetisation) to kind of mitigate or to tail off as we come in 2017, though not from January 1. Clearly, we’re of the view that a formalisation of the economy helps the formal players. I think it’ll be good in the medium-term and the longterm," said Quincey, who is serving as Coke’s chief operating officer and is often credited with steering the company toward drinks that contain less sugar.

India is Coca-Cola’s sixth largest market and is considered key to the company’s growth at a time it is contending with shifting tastes in its traditional markets, such as the US and Europe. In India, too, the demand for healthier drinks is increasing faster in urban centres, with consumers switching to fruit-based drinks.

Uneven rural incomes and the currency swap appear to have depressed growth in rural India as well, with volumes increasing in low single digits over the past four quarters. India’s carbonated drinks sales are estimated at about Rs 14,000 crore. Coca-Cola did not specify India sales numbers for the October-December ’16 quarter, but said global volume sales fell 1 per cent, while net revenues declined 6 per cent.

It said full-year non-aerated beverage volumes increased 5 per cent in the Asia-Pacific region. Quincey said plans to boost growth include focusing on smaller-sized packages and no-calorie sparkling beverages.

In the latest quarter, smaller sized packages sold 10 per cent more, while no-calorie colas saw accelerated growth in the second half of the year.

Coca-Cola’s assessment of the impact of currency swap comes about four months after the Indian government withdrew bills of 500 and 1,000 rupee denominations overnight to help curb counterfeiting and expansion of a parallel economy that the state argues begins with cash as the primary store of value. The withdrawal of these bills hurt sales of goods and services across sectors in the October-December quarter in a country where 98 per cent of consumer transactions were done in cash.

"Things we saw occur in the quarter and responded to included, for instance, India, where demonetisation impacted the whole CPG (consumer products and goods) landscape. Our system responded quickly by facilitating digital payments, extending credit to mitigate destocking, and increasing our emphasis on modern trade," said the CEO-designate.

In 2016, the maker of Coke and Sprite fizzy drinks and Minute Maid juices, reported 3 per cent organic revenue growth. Headwinds facing Coca-Cola include shifting consumer tastes and governments plans to tax sugary drinks. "I think what we need to see is some stabiliastion, and we will be able to then come back and execute our game plan. So I don't think that's particularly about resetting everything we do in India. I think it’s about working through the effects of this one-off demonetisation," Quincey added.

Coca-Cola chief financial officer and executive VP Kathy Waller told analysts and investors that some of the problems may take time to resolve. "For example, in India, where we own the majority of our bottling system, the tough operating environment stemming from demonetisation is likely to persist at the start of the year before gradually recovering," she said.